The Governor this week vetoed SB 1178  (anti-deficiency legislation) which passed both the State Assembly and Senate and only required his signature to become law.   This was an important bill which would have brought back the legal protection to homeowners who often did not know they were losing their legal protection when refinancing their mortgages to obtain lower interest rates.

Simply put, when you borrow money to buy your primary residence in California, the nature or the purpose of that money is called “purchase money.”   Purchase money is protected and if, unfortunately, the house goes into foreclosure, the lenders cannot come after the borrower beyond the collateral or the house itself.   This is with all mortgages, you don’t have to purchase this anti-deficiency protection, it is automatic.    And most borrowers understand this to protection to a certain degree.

What most people do not understand is the moment they refinance their loans to take advantage of lower interest rates, that anti-deficiency protection is waived.   Remember, you are not doing a cash-out refinance (this legislation does not protect cash-outs), you are simply re-financing the existing loan to pay off the home, except at a lower rate.  So if the purpose or the nature of the money remains the same: for the purchase of the home, then why should the legal protection against deficiency change?

What does this have to do with interfering with existing contractual relationship as Governor Schwartzenegger claimed?

In these times where lenders are voluntarily freezing their foreclosure efforts due to improper verification of facts and where State Attorney Generals are stepping up their investigation of these matters, Governor Schwartzenegger should be looking out for California homeowners like the Senate and the Assembly, not siding with multi-national lenders.

He certainly played the role of Terminator this week.

This legislation attempts to protect homeowners who, in an effort to obtain lower interest rates through re-financing their loans, lost an important legal protection that limited the lenders to no more than the collateralized property during the foreclosure process. The loss of this protection essentially gave the lending institutions a second bite at the homeowners; not only were they able to take their homes through foreclosure, but they reserved their right to come after the homeowners for the full deficiency value between what was borrowed and what the property eventually sold  for.   The fact that the lenders would not take into consideration the depreciated market value of the property was an additional slap on the face to the distressed and now homeless borrowers.

As a matter of clarification, it is important to point out that this legislation protects the status of those who re-financed their purchase money loan to obtain lower rates.  It DOES NOT protect those homeowners who obtain cash-out loans and do other things like pay down credit cards or start businesses; activities unrelated to the purchase or maintenance of their homes.

As a San Jose Short Sale Agent, I see this heart-breaking scenario more than I care to mention.  Homeowners who simply wanted to lower their interest rates find out during the foreclosure process that they had given up this incredibly important anti-deficiency protection; a protection they certainly would not have given up had they been made aware that a re-finance would trigger said loss.   This is one of those legislations that is the right thing to do.

Just got a letter from CAR President announcing that Gov. Schwartzenegger signed into law AB 183 which will provide up to $200 Million tax credit to home buyers of both new and existing homes that are purchased between May 1, 2010 – December 31, 2010.

Highlights:

* principal residence

* credit equal to $10,000 or 5% of purchase price, whichever is lesser amount

* credit to be taken in equal amounts over 3 years

* must live in home for at least 2 years

With the Federal First Time Home Buyer Tax Credit set to expire if the buyer is not in contract by April 30,2010, this is the perfect complementary plan to continue to encourage California Home owners to purchase throughout the remaining year  so that we can continue to deplete the excess inventory of distressed properties that are out there  and will continue to hit the market place in the months to come.

Fantastic Job Governator!